The J-Curve

The typical lifecycle of private equity real estate investment returns.

Private equity real estate investors typically earn returns in one of two ways: through ongoing cash distributions over the hold period of your investment, and/or by receiving a share of the property’s final sale price (proportional to your original investment amount). 

Properties and real estate funds that focus on generating income (typically core and core-plus projects) tend to have more conservative target returns and often strive to deliver more regular cash distributions to investors. Growth-focused properties on the other hand (value-add and opportunistic), usually have more limited cashflow to distribute to investors and instead focus on capital appreciation and commanding a higher sale price.

Similar to traditional private equity funds, private real estate funds, such as CrowdStreet Advisors thematic funds and the CrowdStreet REIT I (C-REIT), can experience unrealized negative returns for some time during the hold period, with the goal of ultimately generating a positive return for investors when the buildings do sell. 

Because of this concept, mapping the internal rate of return (IRR) of a fund over time often creates a shape that resembles a ‘J’, leading to the moniker ‘J-Curve’.

EXHIBIT 1: Sample Private Equity Real Estate J-Curve

\       Capital Deployed

Capital deployed represents the investment of capital into the individual real estate projects the fund manager identifies and selects as appropriate deals for the fund.


Investors can receive distributions if/when a property generates cashflow, and distributions can often comprise a portion of the returns for core and core-plus funds. However, this sample J-Curve is more typical of a value-add or opportunistic private equity real estate fund, where immediate income generation is not usually the primary objective.

[   ]   Distributions from Assets Sold

The fund naturally unwinds as individual properties are sold. For value-add and opportunistic funds, the objective is usually to generate the majority of returns to investors from the final sale of the assets. Once all assets are sold, the fund dissolves.

–– Net IRR

Net IRR represents the rate at which each invested dollar is projected to grow for each period it is invested, net of fees and expenses. It is important to review the offering documents for a particular project for more details on the objectives of the project and its fees and expenses.

What can cause the negative returns?

As invested capital is deployed into the various assets over the first few years, investors will incur various management fees and other expenses. This can lead to unrealized negative returns as the properties in the fund may not generate enough revenue, or even any in the case of development projects, to create real positive returns for investors.

What can turn returns positive?

Simply put, distributions help turn returns positive, whether they are generated from income or when an asset is sold. Though like other investments, positive returns can never be guaranteed. 

Growth-focused strategies, like the sample J-Curve, usually need more time to generate distributions to investors. Properties in these funds typically need to be developed and/or remodeled, leased to higher-quality tenants, and given time to appreciate.

It’s important to remember that private equity real estate fund returns should be evaluated using a long-term view, typically over years. Early-stage negative unrealized returns are often a function of the fund’s expected return lifecycle and not necessarily a sign of underperformance. 

As an investor, you must make your own determination of whether or not to make any investment considering your objectives, risk tolerance, and individual financial situation. You should consult with a financial advisor, attorney, accountant, and any other professional that can help in understanding and assessing the risks associated with any investment opportunity.

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